The ongoing trade conflict between the EU and Russia could have noticeable effects on the European economy given the importance
of EU and Swiss exports to Russia. This study provides estimates of the potential economic consequences of the export sanctions
approved by the European Council and the Swiss parliament as well as the counter sanctions enacted by the Russian Federation
on all EU countries. Using a multi-country econometric input-output model the study estimates real value added and employment
effects associated with a decline in commodity exports and tourism demand as observed in recent months. The weak performance
of EU and Swiss exports to Russia, however, is not only the result of export restrictions on sanctioned goods and the worsening
of economic relations between Russia and the EU plus Switzerland, but also a consequence of slackening economic growth in
Russia. The uncertainty about the true economic impacts of the sanctions is addressed by estimating different scenarios and
distinguishing between short and long-run effects.

This report summarises empirical facts about the economic impact of the EU sanctions against Russia and the Russian countersanctions,
both implemented in the summer of 2014. The observed decline in trade volumes between the EU and Russia is not only due to
the sanctions, but also by other economic factors, such as the downturn of the Russian economy, largely caused by the falling
oil price and the ensuing ruble depreciation. Furthermore, empirical evidence suggests that European and Russian companies
alike managed to partly divert trade flows to other international markets in response to the deteriorating trade relationships.
Overall trade diversion, however, cannot nearly compensate for losses of EU exports to Russia and thus mitigate the economy-wide
negative impacts. Finally, descriptive evidence and additional information seem to indicate that compliance with the sanctions
was partly circumvented right after the implementation of the sanctions in 2014, in particular for agri-food goods via countries
of the Eurasian Economic Union. Legal trade diversion through countries unaffected by the sanctions has also taken place.
It is important to emphasise that this study does not assess the political costs or effectiveness of the sanctions, but merely
analyses potential economic costs caused by all sanction measures in place.

Commissioned by: European Parliament

Study by: Austrian Institute of Economic Research – Kiel Institute for the World Economy

Sanctions are one of the favourites in the toolbox of foreign policy. In a diplomatic conflict, they aim to elicit a change
of policies of foreign governments by damaging their economy through restrictions on trade, financial transactions and the
movement of people. However, they are not costless for the sending economy, where domestic firms involved in business with
the target countries might incur collateral damages. This paper evaluates the cost, in terms of export losses, of the diplomatic
crisis between the Russian Federation and Western countries over the Ukrainian conflict. We first gauge the global impact
of the sanctions regime using a structural gravity framework and quantify the trade loss in a general equilibrium counterfactual
analysis. We estimate this loss at 60.2 billon $ over the period from 2014 until mid-2015. Interestingly, we find that the
bulk of the impact stems from products that are not directly targeted by Russian retaliations – suggesting that most of the
loss is not attributable to the Russian retaliation, but to Western sanctions. We then investigate the underlying mechanism
at the firm-level using French customs data. Results indicate that neither consumer boycotts nor perceived country risk can
account for the decline in exports of non-targeted products. Instead, the disruption of the provision of trade finance services
is found to have played an important role.